recently contributed a great article to Supply Chain Brain on the riddle of supply chain cost reduction. In it, he notes that you should not simply “follow the leader” and cut [payroll], cut [advertising], cut [consulting], cut [strategic initiatives] like many (supposedly) “smart” companies are doing, because cutting is NOT a strategy that leads to success.
Across the board cuts, without understanding where your company’s real profitability lies, results in average performance at best and leaves your organization wide open to failure at worst (and gives you a failing grade on the doctor‘s Corporate Intelligence Rating).

The key to cost reduction is to break down your costs into

capital and operating costs,

talent costs, and

strategic costs (for profit improvement initiatives)

and align your costs with your vision and model for success. When you do that, you see that category 1 costs are ripe with opportunities, category 2 costs need to be carefully analyzed, and category 3 costs need to be protected. Did you negotiate your lease during a boom? Is a multi-million dollar enterprise system contract nearing expiration? When was the last time you looked at your outsourcing / support agreements? Operating costs are ripe with opportunity! In comparison, talent costs are a different story. Although many companies are quick to ditch high cost talent, the reality is that doing so usually leaves them in a situation where they are unable to pursue million-dollar savings opportunities because they failed to realize that top talent was paid top dollar for a reason — they were the individuals capable of implementing strategic cost savings opportunities, which should be protected at all costs.

So how do you achieve true cost reduction? Jim recommends you take a holistic-view of your supply chain and focus on Buy-Make-Move-Store-Sell(-Right_Size-Outsource). Specifically, start with:

Buy Sourcing

Make Lean Manufacturing (Waste Reduction)

Move Internal and Domestic Transportation

Sore Distribution Centers

Sell Inventory Management

Right-Size IT Systems

Outsource Non-Core & Strategic Operations

And don’t forget to take advantage of the many service providers who are capable of helping you reduce your category 1 costs (often on a contingency / no up-front cost basis). As Jim points out, transportation costs, purchase costs, customs and duty costs, inventory carrying costs and distribution center costs are all very, very important expenses that in these difficult times need to be reduced, and you should do so aggressively and intelligently. The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.